[Pops]

From a translation of a blog post ...

Forecasts must
count "equivalent barrels"
count "net energy"
count realistic decline rates
count future discoveries at realistic net energy

The result looks like this:



http://cassandralegacy.blogspot.co.uk/2 ... oleum.html

Original post:
http://crashoil.blogspot.it/2012/11/el- ... roleo.html

[Tanada]

Except for the smoothness of the graph I agree, but then again I have predicted the fall off the plateau every year or so for 4 years. Reality tends to be a lot bumpier than this projection. So many hang their hats on the PR releases the news report breathlessly of every "discovery" without applying any critical thinking to what they actually mean in context of consumption. Even the most conservative consumption estimates show we have used up 238Gbbl/petroleum in the last decade. Does anyone think we have replaced 238 Billion bbl in reserves in the last decade? You can't extract it if you haven't found it, and they have been looking just about everywhere for it.

[Shaved Monkey]

Pretty sobering graph.
Factor in the IEA optimism and its probably way worse.

[rockdoc123]

Need to point out that the major drop from the IEA prediction to the prediction this blogger makes (which by the way is not supported by any math I can see) is all to do with the concept of EROEI. I have said a million times on this site that this concept is great when you are looking at macro economics but when you are dealing with micro economics which each and every oil company that explores and produces hydrocarbons is driven by it falls apart. As long as the oil companies can make profits exploring and producing they will do so and that is what affects the production/decline curves, not some concept about how much energy it takes to produce the equivalent amount of energy.
If alternatively it can be shown that costs will rise faster than prices then, absolutely this is a good analysis. At the same time one has to look at what actually constitutes price...much of it is tax. Could the government actually get small enough that it take less tax and allows oil and gas companies to make better profit margins? I doubt that will ever happen given the current view bigger gov't is better. Will unions suddenly decide that supporting high salaries is counter productive?
My point is there are a bunch of things that go into this equation and unfortunately for the energy balance folks EROEI isn't one of them.

[Quinny]

I hadn't seen you RD previously acknowledge that EROEI was a great concept, so am pleased we are now singing off the same book (if not quite the same sheet). I think this clears up a lot of misunderstandings, maybe even pstarr could join us in a group hug The question I suppose is how long before the macro economic factors filter down and effect the micro decisions. The disconnect in various industries tends to lead to drastic crashes rather than moderate price increases. IMO the disconnect is what we see in the bubble economies we live in (and have lived in for some time).

Pops concept of a narrowing band between oil extraction costs and the price 'affordable' to to an economy scares the hell out of me. What happens when the lines cross?

[vtsnowedin]

EROEI doesn't matter right up until it does matter. Would you use 100 barrels of refined diesel to produce 100 barrels of sour heavy crude. Of course not. If you were in military procurement you might spend 5000 barrel equivalents of coal, NG, nuclear power,etc. to get 100 barrels of jet fuel, but economics is not their strong suit.

[Pops]

I agree with all that.

Whether EROEI 90:1 or 9:1 or 1:9 doesn't matter as long as it's profitable for the producer - which means there is utility to the consumer at the price.

Here is the thing, the consumption side is a continuum. Fueling a B1 for an existential mission could be seen as having more utility than fueling the H1 for a beer mission. However, the consumer has at least some control over their consumption. All the way from buying a 12-pac instead of a 6er to save a trip, to moving to an apartment from the exurbs.

That sounds great, just conserve our way out of the mess! But on the production side it's different, that's where and where EROI comes in and where both vt and doc are right. Production is either go or no-go. Either the project is profitable at the current price or it isn't.

Creeping prices are going to be a bigger problem than the astronomical prices some Peakers predicted because prices simply can't stay extraordinarily high. In fact very high prices fool drillers into sinking more wells than the economy can actually support, see natural gas.

As EROEI drops and production becomes more expensive, at some point a range of consumption activities become prohibitively expensive. Demand and the retail price falls below the cost to produce and E&P stop.

[Tanada]

I have been playing with a simple peak calculator I found online;
http://forecast.uchicago.edu/Projects/hubbert.html

it lets you select total reserves, peak date and peak width for either the USA or World. My goal playing with it is to get the best fit with the historical data which it also shows.

No matter how I set it, if the curve matches the historical data the plateau is over by 2020 and decline sets in remorselessly. Can you get a more optimistic result?

[ROCKMAN]

Tanada – Interesting calculator…never played with one of those before. But the one aspect that often seems missing in any forecast is the price model. I gave a long winded rant on that just last night. Earlier in the thread someone hit on the subject. Just poked around your calculator for a few minutes and didn’t see any price forecasting. Not that any such forecast can be assumed to be correct but the value of any model is showing where the sensitive nodes are.

As I pointed out to someone last night who was critical of past incorrect predictions about a lack of US oil production growth: what was the price forecast used to make such a claim? Had they stated, say in 2002, it was based upon oil staying around $40/bbl till 2015 then they would have had a get-out-of-jail-free card. They could argue that their model was solid but a key variable, pricing, changed. And similarly I asked about those hyping our increased oil production from the shales: if prices had been around $40/bbl for the last 6 or 8 years would anyone be using the term “US energy independence” today?

As I think you alluded to earlier price forecasting is the real challenging part of the equation. Deals with so much more than reserves in the ground and technology. Consider the volatility of oil prices in just the last 15 years: $15 -$32-$146-$58-$100-$118-$91. Now let’s see what anyone would suggest for a price forecast for the next 15 years. I’m waiting. LOL. Seems like most take the current price and assume little change over time. Recent history doesn’t tend to support that IMHO. Are we expecting a much more stable/predictable world economy (which hugely impacts energy consumption and thus pricing)? A much more stable political climate in the Middle East…Venezuela…Russia? A stable and predictable growth rate in China/India? A decrease in military adventures in oil exporting regions? An increase/decrease/no change in efforts to deal with AGW? Predicting fracture patterns in the Eagle ford Shale seems simply by comparison. LOL. A mental experiment: when we look at anyone's prediction of future production (optimistic or pessimistic) look for signs of the price volatility we've seen in recent years. If they aren't there how confident will you be in the chart accuracy?

Today we have abundant and relatively inexpensive NG in the US. What will the NG production profile look like for the next 20 years? Give me any price forecast you want and I can offer a very rough estimate including the time lag factor. It would be inaccurate to a degree but would likely characterize the trend fairly well. But if the price forecast isn’t accurate my prediction will be poo-poo. LOL. But at least I’ll be able to blame the price forecaster. LOL.

But there’s also the geologic backdrop to the big picture. Oil/NG are not widgets whose production can be increased continuously because demand and price increase continuously. Increased oil prices allow us to develop known reserves that were previously uneconomical and explore for new reserves that were once considered too risky for the price at the time. When NG prices eventually rise we’ll go back to developing those known reserves. But obviously regardless of how high prices get untapped reserves won’t be spontaneously created by Mother Earth. She has created all that will be in a time frame that’s meaningful to mankind. She had done a good job hiding those reserves but we were also pretty good at developing tech to find and produce what she has given us.

[Pops]

I once read that the resource economy will act like a top that begins to wobble as it losses momentum. (For those of you born into the post-analog world, a top was a toy that was spun fast (by hand!) and balanced on it's point, sorta like spinning a basketball on your finger in a video game.)

That seems like a good analogy to me and means there is no way to forecast price or demand or production at a particular time in the future except to say that the trend will be lower production.


What does that mean for the price?

First, there will be fewer energy slaves available to the economy with lower oil production, that means less absolute production of physical stuff (as opposed to financial "stuff"). Because we will produce less of everything, our economy will be smaller (aside from the part siphoned off by the landlords) and in turn our individual budgets will shrink in real terms.

So what does that mean?

I don't know. Like anything else, there has always been a range of price below which FF production wasn't profitable and above which it wasn't affordable, that won't ever change. Let's call it $80-$120 barrel US today, maybe that's right maybe wrong I don't know – but – I am certain it will be different in the future.

Because the lower limit must necessarily rise, I think, unless it doesn't. Maybe roughnecks will be happy to work for the equivalent of $2/hr and ROCK will be happy with $4, who knows, stranger things have happened. The upper limit to prices can also rise as the uses of oil with less utility are abandoned. That would initially free up some supply, like less driving has done in the US but decline will of course eventually catch up and the wastful uses (like those never traveled miles the last few years) will go away permanently.

Maybe at half today's production the price could be 10 times what it is today and the average income a tenth. ROCK could be fracing away at the north pole making $100 a month and vehicles might look more like one of those bike carts the kids ride in



P.S. Re: BS

All the BS about the "service" economy is just that, BS. Like the man said, you can make any -ism appear successful given enough free energy and the "service economy" -ism is the perfect example. A service economy is everyone working sales and no one working the line making product. There is no "there" in financialization, it's simply charging rent on the past: past capital formation, past land acquisition, past patent/information/copyright, past "inheritance", even claiming genetic material as proprietary property. The increase in the rentier portion of the economy replacing the production economy is the biggest clue that the extractive, industrial, growth era is over. Profits from actual productive work (manufacturing) are falling and once again the "renting" of money, land, "information", etc is ascendant. Back in the day that was the basis of feudalism.

Some links on rent, PO, etc:

Slouching Towards Rentier-Capitalism

http://www.nakedcapitalism.com/2013/01/ ... ether.html

http://www.rooseveltinstitute.org/new-r ... -galbraith

http://carnegieendowment.org/2012/04/03 ... world/a67m

[ROCKMAN]

Pops – Me and the other hands will work dirt cheap during the bad times. Done it before and will do it again if we have to. OTOH the drilling $’s won’t be there nor much of the infrastructure. During the 80’s bust I saw 3 giant rigs sitting in a yard in Victoria, Texas that never drilled a single well. Total cost around $40 million in today’s $’s. After 3 years they were cut up and sold for scrap steel. In the slump in the early 60’s Shell Oil fired every geologist under 30 yo. The big move that happens during a bust is acquisitions. One of the ways Big Oil got bigger. Doesn’t add any production and eliminates competition when things eventually improve. There used to be Seven Sisters…not now. IOW when was the last time you filled up at a Gulf station? LOL

[Pops]

Great, that was the only optimistic spot in the whole disjointed rant!

[ROCKMAN]

Pops – Heck…I thought I was being gloomy. LOL

A side note about that statement: “Quite simply, we are looking at the highest average price since the age of oil began.” Actually it’s not that simple. Every time someone describes the old days of cheap oil I’m tempted to quantify such remarks.

http://inflationdata.com/Inflation/imag ... _Chart.htm

Adjusted for inflation oil was selling for about the same price from 1992 to 2002 as it was during most on the 50’s and 60’s. And in 1999 it fell about 30% below that price. And from 2002 to 2007 prices were about the same as they were in the mid 70’s. We did get that $133/bbl spike in June of 2008 but also spiked at $114/bbl in Dec 1979. But the 2008 spike didn’t last nearly as long as the 1979 spike. As of the end of 2012 we were still about 10% below the prices of the late 70’s and early 80’s.

Not a big deal IMHO but thought it was a good time to add some perspective. And going forward? Time will tell.

[Pops]

ROCK, according to the EIA, the composite average refiner acquisition cost in the record year, 1981, was $35.24. Using the Inflation calculator at the BLS that equals $90.24 in 2012 dollars.

In February the composite refiner cost in the US was $102.82 so $12.58 higher than '81
For all of 2012 it was $100.94 = $10.70 higher
For all of 2011 it was $101.87 = $11.63 higher

Everywhere else in the world the price was more than our refiners paid, EIA 52 week average closing price for Brent (per my spreadsheet) was about $110 last time I checked.

I may need to remove Yergin's one true statement from my sig eventually but not yet, LOL

[ROCKMAN]

Pops – When you look at the price spike in the late 70’s and look at what we’ve been thru recently one might say we may be heading for another major price bust and we could be looking at oil under $50/bbl again. But it ain’t 1986 again. Thanks in part to the POD and countries like China. You would think with the US economic down turn and the various crisis situations in the EU oil prices would have dropped more than they have. And maybe they still will to some degree.

China may have slowed to a dismal 8% growth rate but that still equates to a booming demand for energy. Currently they’re taking advantage of relatively cheap coal prices. But it may not stay cheap much longer and besides, all those millions of new cars they are buying in China aren’t coal burners.

A very different world than what we had 30 years ago in so many ways with respect to energy. Relying on past dynamics may not be the best way to anticipate the future.

And DY does make a good point even if it wasn’t his intension: higher oil prices are leading to more oil production which, to some, refutes the idea of PO. As I said before to me the rush to the oil shales and the increase in US oil production is some of the best evidence supporting PO.

[Pops]

No it isn't '86, back then the US had 623m wells making 13.9bbl/day avg, today (2011) it's 536m @ 10.6bbl/d.

In '08 the per well average was just 9.4bbl and had been dropping more or less steadily since the high of 18.6 in '72.

Here blue is well numbers and brown is per well avg production:

avg well.png

http://www.eia.gov/totalenergy/data/ann ... ?t=ptb0502

Notice how that 20% bump in well numbers (blue) in the '60 caused a subsequent 50% rise in average production (brown) in the '70s. But the 25% increase in wells in the '80s (AK) produced no such increase in productivity. That chart will be interesting to watch over the next few years. I think we can figure that avg production will increase in step with well numbers as long as the sweet spots hold out but when the blush is off the bakken drilling boom we'll return post haste to that trend line. And in fact indications are, the trend will be much sharper, more like the '65-'72 period since the "New" wells are strippers overnight.

[ROCKMAN]

Pops – Actually that bump in the 70’s corresponds to a very significant development in US oil production: the shallow water (<600’) Gulf of Mexico federal water development. I began my career working this trend in 1975 and it was truly a wild calf scramble. Two or three bid lease sales per year. Every rig available working. By 1972 production in the GOM reached about 1 million bopd. And given the nature of offshore production wells had to be completed and produced at the highest rate possible. But those high rates also delivered rapid declines.

And now we’ve seen a repeat thanks to the Deep Water: 2001 = 1.6 million bopd. And in 2001, U.S. deep water offshore oil production surpassed shallow water offshore oil production for the first time. And by 2009, 80% of offshore oil production and 45% of natural gas production occurred in water depths >1,000 ft, and industry had drilled nearly 4,000 wells to those depths. Contemplate that for a moment: the shallow shelf which had once been producing over 1 million bopd has dropped 70% by 2009

Many folks have been lulled into thinking the oily shales are the backbone of US oil production. But in 2009, GOM production accounted for 31% of total domestic oil production and 11% of total domestic natural gas production. The shales have certainly benefited us. But that DW base is not new. It began development over 30 years ago with more than 160 fields developed. In 2007, a record 15 rigs were drilling for oil and gas in water depths of 5,000 feet or more in the Gulf of Mexico. Operators have drilled about 700 wells in water depths of 5,000 feet or greater. It’s a fairly mature trend. More important: DW production is designed to produce even faster than the shallow shelf fields. As much as the DW fields have helped stabilize US production few of those fields will be producing significant amounts of oil 10 or so years after they went on line. More big DW fields left to discover but IMHO we’re currently peaking out there.

[Pops]

Thanks ROCK, here is offshore production for left-brainers like me (ibid):

offshore.png